Overconfidence and Corporate Tax Policy

52 Pages Posted: 14 Mar 2014 Last revised: 14 Jan 2017

James Chyz

University of Tennessee

Fabio B. Gaertner

University of Wisconsin - Madison - Department of Accounting and Information Systems

Asad Kausar

Nanyang Technological University (NTU)

Luke Watson

University of Florida - Fisher School of Accounting

Date Written: January 10, 2017

Abstract

Using a sample of firms experiencing exogenous CEO departures, we investigate whether firms with overconfident CEOs avoid more tax. Overconfident CEOs are more likely to overestimate the net benefits from investments in tax planning and thus avoid more tax. Consistent with this prediction we find robust evidence of a positive relation between proxies for corporate tax avoidance and CEO overconfidence. Because our empirical tests use a panel of firm-years with exogenous CEO changes and include controls for stationary firm effects as well as observable firm characteristics, we are able to isolate the role of an idiosyncratic personality trait (i.e., overconfidence) on corporate tax outcomes, thus adding to the literatures on overconfidence, managerial effects, and tax avoidance.

Keywords: Overconfidence; tax avoidance; manager effects

JEL Classification: D80, M40, H25

Suggested Citation

Chyz, James and Gaertner, Fabio B. and Kausar, Asad and Watson, Luke, Overconfidence and Corporate Tax Policy (January 10, 2017). Available at SSRN: https://ssrn.com/abstract=2408236 or http://dx.doi.org/10.2139/ssrn.2408236

James Chyz (Contact Author)

University of Tennessee ( email )

Knoxville, TN
United States
865-974-1701 (Phone)

Fabio B. Gaertner

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Asad Kausar

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Luke Watson

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States
352-273-0208 (Phone)

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